John Hoffmire: Black markets are bigger and closer to home

Anastasia Danias, with the NFL, speaks about the security features of Super Bowl XLVIII tickets during a news conference on counterfeit merchandise at the NFL Super Bowl XLVIII media center, Thursday, Jan. 30, 2014, in New York.

The words “black market”usually refer to illegal business activity. The biggest and most notorious markets relate to illegal drugs, human trafficking and piracy-counterfeiting. Combined, these markets are valued at $1.2 trillion worldwide. The global economy as measured by the World Bank produced a gross combined national product of $72 trillion in 2012.

One has to remember that it is extremely difficult to estimate illegal economic activity figures because of the market’s own nature, it wants to be hidden. Actually, this $1.2 trillion figure is probably underestimated. Rough calculations from Havocscope, The Economist and the United Nations state that the drug market is worth about $550 billion, human trafficking $250 billion, and piracy-counterfeiting $412 billion. Also, these figures don’t include an estimate of money laundering activities, which alone add up to no less than $1.5 trillion.

Where are black markets most prominent? Most particularly, the answer is here in the U.S. According to Havocscope, ours is the biggest illegal market in the world, with about $625 billion in revenue. According to the CIA World Factbook, we are the net largest illegal drug consumers on the planet. The second biggest illegal market is in China where $260 billion in illegal goods are consumed and next largest is in Mexico, where $125 billion worth of illegal activity is transacted.

The next question is why the black markets are so important? First, it’s because millions of people are affected. It is also important because most of its activities end up harming people. Worldwide, around 200,000 people were killed by drug abuse in 2012, of which 41,000 were living in the U.S. Regarding human slavery and trafficking, the FBI reports, about 293,000 youths in the U.S. are in danger of becoming victims of sexual exploitation as they become runaways or are abandoned. Another 17,000 people are trafficked into the U.S. every year. Moreover, according to the Polaris Project, there are around 27 million people in slavery conditions worldwide as of today.

Additionally, regarding piracy and counterfeiting, their importance lies in the immense losses companies face. Just imagine how many more dollars of revenue Apple or Nike products would create if their products weren’t being constantly pirated. Moreover, this lost business activity means that millions of workers in developing countries who often make clothes, shoes, electronic goods and other products end up working for less scrupulous manufacturers. While not all the manufacturing firms used by U.S. companies overseas are perfect, it is generally accepted that they are better employers than those that specialize in pirated goods.

How did the black markets grow so big? According to Moises Naim, former director of foreign policy, when global trade began to take off in the 1980s, trade barriers were falling and a wider range of products flowed in and out of countries. Given that this flow was so vast, it was impossible to check every container for illegal goods. Taking advantage of these new opportunities, black market entrepreneurs grew with ease.

Finally, money laundering has a predominant role in todays’ black market economy. Of the $1.5 to $2.5 trillion that is laundered every year, some is related to the same products that are named above. But another large part of the laundered money flows as a result of illegal arms trade, tax evasion and supporting terror. Globalization made free capital movements possible, now we are all paying the price of the freedom that we have gained.

The U.S. is known as the country with the tightest regulations around money laundering. This is partly because of the use of the dollar as a predominant currency. Related to this, U.S. government entities fined HSBC $1.9 billion recently over alleged funds funneled from Mexico’s cartels.

While trade, globalization and cross-border movement of monies are all positive parts of the world economy, they all come with costs when black markets are concerned.

John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at the Wisconsin School of Business at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development. Mario Mercado, Hoffmire’s colleague at Progress Through Business, did the research for this article.